ECB Hike Spurs Euro Higher on Hawkish Stance

The European Central Bank (ECB) has taken a hawkish stance by raising its policy rate by 25 basis points to 2.50%, as widely expected. This move is seen as a no-brainer, according to ECB President Christine Lagarde, who also signaled that more hikes are in the pipeline due to inflation remaining above target for an extended period.

The ECB revised its baseline inflation projection higher for 2027 and 2028, while keeping it unchanged for 2026. Additionally, the real GDP growth forecast was revised upwards for both 2026 and 2027, with no change for 2028. However, the outlook remains highly uncertain, with risks to the upside for inflation and to the downside for economic growth.

As a result of this hawkish ECB stance, the EU-US rate differentials are expected to remain broadly supportive for EUR/USD, currently trading around 1.1600.